You must have little or no money left over after paying essential living expenses each month, such as rent, utilities, and groceries, to qualify for this relief. For example, if your income isn’t high enough to pay for food, rent, and the electric bill—and you can prove it—the IRS may decide you’re eligible for CNC status.
How Currently Not Collectible Works
Currently-not-collectible status can provide time to get back on your feet and figure out a way to pay off the IRS without the immediate threat of collections activity. Your tax debt does not go away, though. You’ll still owe the past-due tax, and the balance will continue to accumulate interest and late penalties. The IRS will hold onto any tax refunds you might be entitled to in future years until your balance is paid off. This process is referred to as a “refund offset.” The IRS might also file a Notice of Federal Tax Lien against your property, and this will show up in public records. It will put creditors on notice that you owe an outstanding balance to the IRS. A tax professional can help you evaluate whether you’re a good candidate for the status of currently not collectible and can suggest other options for dealing with your tax debt. They’ll calculate the monthly payments you’d be required to make on an installment agreement, the likely settlement amount you’d owe if you were to ask for an offer in compromise, and review your eligibility for CNC status. As an example, suppose you’re 65 years old and have an eight-year-old tax debt. You make $30,000 a year and have just enough money to pay for rent, utilities, groceries, and your monthly bus pass after taxes are withheld from your wages. The IRS may review your financial situation and determine that you qualify for CNC status. However, CNC status is not permanent. The IRS will continue to review your file, and it may remove you from CNC status if your financial situation improves.
Requirements for Currently Not Collectible
To receive the status of currently not collectible, paying your taxes must cause you significant hardship. According to the IRS, “significant hardship” means that paying anything toward your tax debt at this particular point in time would result in “serious privation.” You’d be doing without some of the necessities of life if you were to give your money to the IRS instead. It doesn’t mean that living without making some expenditures would be unpleasant or inconvenient. To decide whether you qualify, the IRS will see whether you meet one or more of the following requirements:
There are only a few more years left on the 10-year statute of limitations the IRS has to collect your tax debt. You make less than $84,000 a year. Your living expenses fall within IRS guidelines. You have little or no money left at the end of the month after paying your basic living expenses. Your only income is from Social Security benefits, welfare benefits, or unemployment benefits. You’re unemployed and have no other source of income.
If you qualify, the IRS will place a “closing code” on your account when it approves you for currently-not-collectible status. The code tells the IRS when to pull your file for review to determine if your circumstances have changed. It correlates to annual income. For example, if the IRS approved you for CNC status when your income is $30,000, it may place a closing code to flag your account when your reported positive income reaches $36,000. Ask the IRS what closing code was used when setting up your non-collectible status. That way, you’ll know what income level will trigger a follow-up and when.
Income Requirements
The IRS considers several types of income for CNC status, including:
Wages Interest Dividends Schedule C net profits Schedule F net profits Distributions Other income
Expense Requirements
Allowable living expenses are referred to as the “collection financial standards.” There are four sets of standard living expense data:
Food, clothing, and other household-type expensesOut-of-pocket health care expensesHousing and utilitiesTransportation
Suppose you pay $6,000 a month in rent. You’re single with no dependents. The IRS knows that it typically costs about $2,000 to rent a one-bedroom apartment in the city where you live. It will only allow you $2,000 in rent expenses regardless of how much you actually spend.
Requesting Currently-Not-Collectible Status
To qualify for currently-not-collectible status, you’ll need to either contact the IRS directly or hire a tax professional to contact the agency on your behalf. You’ll need to provide information about your income and expenses, and you may need to provide documentation of these as well. If you don’t qualify for currently-not-collectible status, you may qualify for an installment agreement to make your tax payments more manageable. Don’t ignore your tax debt; the IRS can garnish your wages and bank account. It’s best to be proactive in dealing with unpaid taxes.
